Price and Information in Life Microinsurance Demand: Experimental Evidence from Mexico

October 2012
By Jonathan Bauchet

Price and Information in Life Microinsurance Demand: Experimental Evidence from Mexico
Poor households in developing countries face large and varied risks, but often have inadequate informal tools to manage them. Microinsurance is being developed to create a better alternative, and it should--in theory--be in high demand. Yet take-up of microinsurance remains low. I study the impact of price and information on the demand for life microinsurance among microfinance borrowers of Compartamos in Mexico. I randomly assigned 8,700 borrowers to two of four treatments: (i) no longer receive a base amount of subsidized insurance coverage (high price) or keep the subsidy (low price), and (ii) being informed with a message emphasizing the financial toll of a funeral and how the insurance payoff helps to face it (financial information) or information emphasizing the emotional toll of a funeral on the surviving family (emotional information). On average, eliminating the subsidy led to a decrease in insurance coverage, but the two messages did not impact coverage. The impacts are heterogeneous, however. Although all borrowers decreased their coverage as the subsidy was eliminated, younger borrowers presented with the emotional information were less likely to drop coverage than their counterparts presented with the financial information. The impact was reversed for middle-aged borrowers: the financial information led to a smaller drop in coverage following the elimination of the subsidy. The findings add to the literature on how information drives behavior in developing countries, and suggest that specific information provided at the time of choice was critical to help borrowers make a decision regarding a risk management strategy.